What is meant by an exempt supply in terms of VAT?

An exempt supply in the context of VAT refers to goods or services that are not subject to VAT and, importantly, do not allow businesses to reclaim any VAT on related purchases or expenses. This means that when a business sells exempt supplies, it does not charge VAT to customers, and because these supplies are outside the scope of VAT, the business cannot recover any VAT incurred in the process of making those supplies.

For instance, many financial services, education, and certain healthcare services are considered exempt supplies. When a business engages in exempt activities, it does not contribute to the VAT pool, which influences its ability to act as a VAT collector or to reclaim VAT on inputs associated with those exempt sales.

This understanding highlights why the other options do not accurately represent exempt supplies. Options involving reclaiming VAT would suggest that those supplies are not exempt, while those referencing reduced rates or specific sectors may involve different VAT treatments entirely, such as zero-rated or standard-rated supplies, which influence reclaim eligibility differently.